Never afraid to splash the cash, HP has bought Autonomy for 10 billion dollars while abandoning the tablet space where it showed great potential. James West says this could be one of the biggest mistakes in enterprise computing history and decides to tell HP about it.

Dear HP,

You were smart enough to realise the introduction of iPhone was the start of something big and proved you were serious about it by purchasing Palm in 2008 for $1.2 billion. You then got busy refining the WebOS software you acquired and begin putting it into your own range of tablets and phones. You release the HP Touchpad, which many hailed the closest rival to Apple’s all conquering iPad. Even if you don’t catch Apple, you are positioned to take a share of the biggest hardware revolution (and goldrush) since home computers became ubiquitous.

Then you give up.

Much of the focus this week has been on your $10 billion buyout of Autonomy and your plans to become a cloud software provider. You do this because you are suffering dwindling profit margins on hardware and so you argue that the powerful search capabilities of Autonomy will enable you to sell software to businesses, of all sizes, who are struggling to find meaning in their data piles.

Here’s the problem. Cloud is not likely to be a big cash cow. At the moment, many businesses are doing very well using cloud, but this is because it is a novelty. It is after all, just a slightly different way to deliver software and services. Once the hype has died down and the competition increases, prices on cloud software will be forced down.

If you don’t believe me, consider how the two rivals you have ceded defeat to in the smart device space – Apple and Google – treat cloud: they give it away. Google Apps and search, Apple’s upcoming iCloud are free. Why? Because they exist to sell hardware. Lion, Apple’s latest operating system is £21.99. For a fully functioning, 250+ new features, brand new design operating system. For just over 20 quid. Yet Apple has the highest profit margins in the business because it sells premium hardware. It does this by making desirable software that is cheap enough for all of its users to enjoy the benefits. And all people need to do to access this wonderful world is buy a very beautiful computer that costs probably three times more than rival machines.

This is why Google has spent billions buying Motorola, because it knows that to compete with Apple, it must have the hardware piece to compliment its software. Making hardware desirable is not just a case of snazzy design and marketing. Apple has that, but the tight integration between its software and hardware is what solidifies its branding by (largely) delivering the experience promised. Google knows this and is willing to spend $12.5 billion on the hardware component it needs to match the experience.

Admittedly, the enterprise software space is not quite the same as the consumer space and there is clearly money to be made from high end applications. But the lines between corporate and business IT are blurring. Both parties want technology that is useful, enjoyable to use and reliable. To do this, hardware and software must be working in harmony.

When you bought Palm, you had the chance to do this and become a giant in mobile. But because you didn’t get instant results, you’ve let others muscle you aside, and now you will have to watch as Google and Apple push each other to excel and capture huge marketshare.

Best of luck with the Autonomy buyout, but don’t be surprised if you are looking back in a few years time and wishing you’d spent some of that $10 billion taking the final step into the tablet/smartphone space.